Bootstrap First, Raise Money Later from Houston: Onit CEO Eric Elfman (Part 6)

Sramana Mitra: You did a private equity deal in 2018 with the $16 million trajectory?

Eric Elfman: Yes. We did that deal in November of 2018. We were at about $14 million when they closed, but we had a clear sight to $16 million by the end of the year. 

Sramana Mitra: What was this private equity firm and what kind of a deal structure did you do? Did you take some of the founders or did the early employees take liquidity? Did you put all of it into growth?

Eric Elfman: It was K1, a young private equity firm. They are about the age of Onit. They are nine years old, but they raised $4 billion and they are raising another fund that could potentially double that.

They are a young fund but eager with the singular focus of helping B2B SaaS companies grow from $10 million to $100 million. It was a majority recap.

For about a year before that deal, I was talking with my board about valuations for high-growth SaaS businesses. I didn’t believe they can get much higher, which means they can only go lower. I wasn’t predicting a dot-com crash event, but I said that there was an enterprise value and we ought to do a majority deal.

I got them on board and eventually raised that money. We had the patience to wait for that valuation. They took out all my institutional investors and the majority of my angel investors, and employees took some liquidity. I took some liquidity but I put in the majority of my stake into the next entity. 

Sramana Mitra: How much did you raise?

Eric Elfman: It was a $200 million round. 

Sramana Mitra: I did not ask you about the earlier funding round. It seems like you had angel investors and VCs earlier on as well. If you could just talk me through to what point of the history of the company that you raised money. 

Eric Elfman: My partner and I were the first investors in the company and that is where we started playing with ideas. From 2010 to 2011, we raised angel capital of a couple of million dollars in total. It was nothing similar to what we did in the previous company because I was determined to get pure high-grade venture capital in this business earlier.

When we were still pre-revenue, we took $3 million from Austin Ventures, -which was a big player in Austin, but they were getting out of early-stage investing. A couple of years later, we took a total of $8 million from Level Equity out of New York. They call themselves private equity, but it’s a hybrid between venture capital and private equity.

We eventually raised $16 million. We have always been capital efficient. Although it’s nothing to raise $16 million, it got us to the exact number of ARR which is capital-efficient these days. 

Sramana Mitra: With $16 million, you raised $200 million. You got a high valuation on that round. 

Eric Elfman: We did. 

Sramana Mitra: What happens after 2018?

Eric Elfman: We go to work growing the business. We’d always been an organic growth engine. We had never acquired a company like Onit. With private equity comes power to acquire. Six months after we did our K1 deal, we did our first acquisition of a Silicon Valley company for over $50 million. 

Sramana Mitra: What do they do?

Eric Elfman: It was very similar to our primary product – enterprise legal management except for a sub Fortune 500 play. They operated at the next 2000 smaller legal departments. Earlier, it was a different segment of the market.

We acquired them not to convert their customers to ours; we continue to run that as a standalone business. All the employees report to the GM and instead of the GM reporting to the board, he reports to me. We collaborate on marketing and sales and continue to grow both of these as high-growth businesses. 

This segment is part 6 in the series : Bootstrap First, Raise Money Later from Houston: Onit CEO Eric Elfman
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